(Bloomberg) -- Macro and commodity trading advisers have delivered the two best investment strategies for hedge funds this year. But Brooks Ritchey, who helps oversee $3.5 billion at Franklin Templeton, is trimming his holdings as he prepares for a major shake-up.
K2 Advisors LLC plans to shift some of its capital toward relative value and long-short equities over the coming months, betting a surge in interest rates and inflation will take many by surprise in mid-2020. K2 is a unit of global investment firm Franklin Templeton.
“The macro managers, the ones we follow and utilize, are long U.S. dollar, long bonds and they’re long equities,” Ritchey, head of portfolio construction at K2 Advisors, said in an interview in Singapore. He predicts much of the alpha -- the level of growth above comparable benchmarks -- for both macro and CTA will start getting squeezed beginning in April.
Macro investing seeks to take advantage of broad shifts in the market caused by major events, while CTAs use momentum trends to make their picks -- if a market enjoys sustained growth, the funds will often bet that will continue. The strategies returned 8.5% and 7.3% respectively this year through August, data from Eurekahedge Pte show.
“One of the crises that could be setting up for next year is a surprising uptick in government interest rates, inflation returning and the yield curve steepening a bit,” Ritchey said. “No one is really talking about global growth and everyone thinks inflation is dead and that the whole world is becoming like Japan. Some of our smarter hedge fund managers don’t agree.”
Ritchey is no stranger to controversial views -- earlier this year he said he’d pulled out of all but one of the trend-following quant funds K2 had backed. But his $2.3 billion Franklin K2 Alternative Strategies Fund has delivered relatively solid results despite its low-risk appetite, returning 6.2% since January.
And he may not be the only fund manager with the same ideas on allocation. Despite the strong performance of macro funds this year, Eurekahedge Pte has tracked 13 new launches and 71 closures in the category between January and September. If just four more shutter in the next 60 days, it will represent the biggest year in macro fund closures since 2015.
The K2 fund’s fact sheet shows that a quarter of its invested capital was in global macro funds as of Aug. 31, consisting of EMSO Asset Management Ltd., H2O Asset Management LLP, Graham Capital Management LP and Grantham, Mayo, Van Otterloo & Co.
Ritchey said more capital would be allocated to hedge funds with relative value strategies while its long-short equity money would be adjusted to give more weighting to those investing in European long-short strategies.
“On macro-CTA we were very lucky, very fortunate and we increased the weight quite substantially about a year and a half ago. We’ll probably trim and take some profit there,” he said.
(Updates with Eurekahedge data in seventh paragraph.)
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